Prior to KilterHowling, I, Will, spent the lion’s share of my career in the alternative investment industry – hedge funds. Building and managing portfolios of hedge funds for individuals, banks, and institutions was my daily fare. Kreighton and I built KilterHowling with risk management as a key building block of our philosophy. It’s no surprise from where I got my training.
Hedge funds were, and largely still are, the first stop for wealthy investors seeking that difficult mix of growth coupled with risk management. Creating this careful balance is the art of investing and hedge fund managers and the strategies they employ are some of the best at it. Put most simply, hedge funds are where investors who won’t tolerate draw downs go to meet the those who know how to deliver. It’s about risk and return – not one without the other.
However a few things have changed in the hedge fund world. With more funds making established strategies less effective, returns just haven’t been as attractive. High fees have compressed, but are still expensive. Correlations of hedge fund returns to traditional assets have gone up and therefore diversification down. A few seriously harmful frauds occurred. Limited partnership investments are far less liquid than holding a mutual fund. Calpers, one of the largest institutional investors in the world, recently publicly announced it was firing all of its hedge fund managers.
The link below does a great job of explaining some of these evolutions. You read quotes from the head of a global hedge fund industry group (AIMA), a few consultants, and a pension funds including Calpers. The article review is mixed. Some proponents continue argue for the capital preservation and risk adjusted returns wealthy investors favor that hedge funds can provide. Opponents site the lack of performance contribution compared to traditional alternatives.
Hedge funds come with trade offs and are not for everyone. But there are takeaways appropriate for all investors. The risk management and absolute return approach so central to the investment processes of the world’s best hedge fund managers should not be the exclusive domain of institutional investors. Marry those investment tenets with low fees, liquid separate accounts, and an investment approach that works without leverage and now you have an idea of what we are doing at KilterHowling.